Archive for the ‘Federal Reserve’ Category

I hear and read endless speculation about this one and that one, and who’s in and who’s out, always superseded by the next day’s news, and always bereft of any measurable facts. All of this can be both entertaining and frustrating. All of it may be altogether pointless. You see, the country is dying now. By the time a new president is inaugurated in January of 2017, on our present course, it may not make any difference. The country may be closing in on that tipping point, if we haven’t passed it already, at which nothing will be done to save us, irrespective of party, principles, or propaganda. Our nation is deathly ill, if not terminal, and yet the politicians continue to chatter on as though there’s no end in sight. Ignoring the stock market, which is many thousands of points over-valued due to cheap money practices at the Federal Reserve, this economy is a wreck. As always, I urge my readers exercise care in what they believe or are willing to consider plausible. In this post, I intend to revisit a topic I haven’t covered in a long while, because I think you ought to consider it. The subject is the very real possibility of a hyperinflationary great depression that will make the 1930s look like a day at the beach.

As a reference to what hyperinflation looks like, here’s a graph of the infamous hyperinflation in the German Weimar Republic:

German Hyperinflation 1918-1924 (Wikipedia)

Long-time readers will remember I have used John Williams’ ShadowStats website as a reference in the past. The nature of Mr. Williams’ warning hasn’t change, except to become substantially more strident inasmuch as such a calamity now seems to be possible at any moment. For those of you who don’t remember, here was his Hyperinflation forecast of 2012:

In these reports, Mr. Williams goes to extraordinary lengths to describe to you what I’ve told you right along, since the birth of this website: Any alleged “economic recovery” was a fraud, and the nation is in deepening financial and economic trouble. Naturally, it’s not as though you hadn’t suspected it on your own, the obvious signs being what they are, but with the drumbeat of media, many people are soothed into complacency over a long enough time such that they begin to doubt what their own eyes and wallets are telling them. In these most recent installments, Williams goes into great detail, putting numbers to the assumptions, providing actual data to support his conclusions. In this sense, it is time for another reality check, because while the bulk of the people you know may well be ignoring hard reporting, in favor of popular media garbage, somebody ought to be warning them. Chances are that being the good citizens most readers here tend to be, and being the sort of people who are trying to save their nation from disaster, you’ve been warning them right along. Now, when they dismiss your warnings, you can dare them to read these reports.

If you’re among that number of people who are desirous of dismissing all of this as “Chicken Little” talk, I’d dare you directly. Read these reports and if you aren’t at least a bit concerned, concerned enough to learn more, there’s no reaching you anyway. In 2011, Sarah Palin and others were sounding the alarm. She was ridiculed and mocked, but the hard data supported her warnings. All along, I’ve been warning you of the dangers of the monetary policy of the Federal Reserve, and the grotesque expenditures of the Federal Government. In the years since 2008, when this latest crisis began, the Fed has borrowed into existence a sum approaching(if not exceeding) fifty trillion dollars.

All of this money-printing or “digitizing” will necessarily lead to a calamity of unprecedented scale. There can be no escape from the laws of economics, any more than there can be an escape from the law of gravity. The only question is: When? As Mr. Williams points out in his report, the conditions are already in place. It’s simply a matter of triggers. With that in mind, I’d ask my readers to prepare to the extent they are able.

Some will argue that all of this is tantamount to alarmist fear-mongering. but Williams does offer this, in his second installment for 2014:

“Conceivably, immediate massive and fiscally painful action by the federal government to restore and maintain long-range U.S. government solvency still could avoid the looming dollar collapse, but the related political issues appear now to have been pushed off until after the 2014 midterm election, again, as those controlling the government continue to push politically-difficult choices and actions as far into the future as possible. That has been explicitly demonstrated in actions by both the White House and Congress in the last several years. Nonetheless, despite political efforts to dodge the issues, the U.S. dollar and the deficit do matter, and the looming financial storm likely will break before the election.”

In other words, getting our financial and fiscal house in order could still serve to avoid this calamity, but as he notes, and as we are all too aware, the probability of that being done is low. The question isn’t “Will there be pain?” The real question is whether it will be pain we choose while we maintain the ability to moderate it, or an uncontrolled and apocalyptic pain from which there will be no recovery. We’re very much like a stage four cancer patient in that only the most radical treatments have any chance of saving us, and the chemotherapy and radiation will be so severe and thorough as to inflict more pain than we might want to endure, but failing to choose this, the results are known and unavoidable.

I have significant doubts as to whether there exists the political will to induce pain via the radical treatments necessary. The politicians in Washington DC are hoping to stave-off this calamity through the current election cycle. I believe this is folly, but I also know they’re banking on the notion that they will be able to deal with this after the election, but you and I know the truth: There’s always another election. The dust will still be settling from the 2014 election when the first real moves for 2016 begin. They will already begin to make the political calculi about how to survive through the next election, or how to save the next election for their respective parties, but none of them will be thinking about any of this. The truth is that saving the nation will be furthest from their minds.

We have a president who is a functional economic illiterate, driven by dogma of a failed ideology. We have a Congress driven by short-run notions of self-preservation of their power. We have a people who possess a low tolerance for bad news in good times, and a complete intolerance for self-imposed discipline particularly where it implies any sort of pain. It’s time to consider what all of this will combine to create in the coming years, if you haven’t done the math already. People are talking about 2016 like that represents some sort of panacea, but ladies and gentlemen, our nation may not make it until 2016.

Editor’s note: I realize that the linked reports from John Williams’ site constitute a fair bit of reading, but like most issues, the devils lie in the details. Understanding the roots of our impending calamity, and the historical precedents as well as the actual manipulations of statistics by the current regime are critical in understanding what is afoot. While it’s a lot of reading, it’s entirely worthwhile.

Note 2: There was an error in the links to the two 2014 reports. These have been fixed.

I’ve written and re-written this piece a number of times, in part because I don’t wish to cause undo angst, but also in part because I don’t wish to cause too little. You can blame Barack Obama, George W. Bush, Congresses past and present, or Ben Bernanke and his predecessors for all it matters, because in the context and scope of your life, it won’t make much difference. We are headed for a complete collapse, and the collapse is no longer some vague notion in some nebulous, faraway universe of remote possibilities. At least one analyst has concluded that by 2014, at the latest, this country is going to enter a period of economic turmoil that will make the Great Depression of the 1930s look like a garden party. The media won’t tell you this, whether CNN or the New York Times; neither FoxNews nor the Wall Street Journal. We are staring directly at the muzzle of a colossal gun, and it’s aimed at the heads of every American, but neither the current President nor the current Congress will tell you how bad it has become. For two generations or more, the hand-writing has been on the wall, but unlike ordinary ink that will fade with the passage of time, this bit of script has become bolder, heavier and finally, indelible. There will be no avoiding it. There will be no escape. This time, we will go down, and we may well never stage a comeback. The gun is aimed at our heads, and we loaded it.

To understand this will take a little time, although regular readers of this site will know most if not all of the gory details. For a brief primer on what will soon confront us, please take a look at this report on Hyperinflation at John Williams’ Shadow Government Statistics website. It’s lengthy, but it is information every American should learn and know, because while it is a bit of a reading chore, particularly for those whose eyes glaze over at the first hint of economic and financial terminology, it is nevertheless important information, and Williams does a remarkable job of not allowing the material to become overly dry. His report really doesn’t need any dressing-up or embellishment to be terrifying.

If you’ve been paying attention to the news beyond the international developments of the last few days, you will not have missed the fact that today, the US credit rating was again down-graded again by Egan Jones. You should expect this trend to continue for some time, but this downgrade, like the last round of them a little more than one year ago, really doesn’t tell us anything we should not have known: Our currency is on the verge of collapse, and our ability to repay debt is becoming more challenged, but the fools in Washington DC don’t tell you about it because they’re afraid if you knew how bad it really is, you might react badly. In the movies Armageddon and Deep Impact, the governments portrayed did their best to keep their respective impending disasters secret for as long as possible. The thinking was: If it’s inevitable, such that all we can do is make things worse between now and the impact(s) by disclosing it in advance, we should say nothing until the last possible moment. Another way of looking at this is the question I once posited:

“The government is spending like there’s no tomorrow. What if there isn’t?”

The fact is that we don’t need Hollywood or the Mayans to provide apocalyptic scenarios to fulfill this role in our immediate future. Our Federal Reserve(hereafter, simply “the Fed”) in concert with our Federal government have created something nearly as disastrous, and potentially, every bit as deadly. As Ben Bernanke uses his powers as Chairman of the Fed to undertake another round of quantitative easing. As you’ll remember from previous rounds of this same tactic, this amounts to money printing, a way to inject more cash into the market in the attempt to stimulate lending and business activity. The problem is that each time this is done, what actually happens is that the value of the dollar falls versus commodities such as oil, or other energy sources, and the cost of everything increases. When this happens, it makes it harder for business to operate, harder for consumers to spend such cash as they may have, and otherwise has precisely the exact opposite effect, all while driving us closer to the brink. Bernanke is trying to drive us away from a deflationary cycle that could result if the economy stalls too steeply, but the problem is that he’s going to cause what will be infinitely worse.

At the same time, our Congress and our President have added to the problem, because each time they borrow money, the Fed is printing it into existence. In short, both our fiscal and monetary policies are rigged in favor of inflation, and with all the money-printing, it is only a matter of time before the dollar becomes completely worthless in the world market. Any small displacement in the market could lead to our economic demise. Williams’ report for 2012 goes so far as to suggest that you concentrate on bare survival strategies, and defending yourself in the face of complete political and social disintegration.

I know that you’ve been reading about a “financial cliff” somewhere in the distant and murky future, but what I’m telling you to do at this point is that the veil of fog is beginning to lift because that future is no longer distant. Williams’ report explains thoroughly the main causes of our impending doom, and this isn’t some conspiracy nut. When he published this update earlier this year, his warnings sounded eerily like my own, and also those of a few other people who have been sounding the alarm, including some in talk radio, in conservative media, and notably, Governor Palin. At the time of the announcement of QE2, Gov. Palin did a rather bold thing: She announced to the world the dangers and the certain results. Naturally, since her evaluation was based on sound economic understanding, her conclusions might well have seemed prophetic in light of all that has happened since. The truth is that she was merely telling you what must be based on the immutable laws of the universe: There are no free lunches…or anything.

I believe this is one of the reasons the Republican leadership in Congress has done nothing to substantially obstruct President Obama’s agenda. It is true that they would have faced some political consequences, but what’s more the case is that they are every bit as aware of the impending collapse as anybody in the executive branch. One might view Congress cynically, and suppose they are “getting while the getting’s good,” and there’s no doubt that some of that goes on, but it’s also true that the problem is so gargantuan that they do not see how they can correct it without throwing the country into complete chaos, and since that’s what’s coming anyway, they see no point in hurrying the matter.

Some have concluded that Bernanke is taking this up now in order to try to help Obama’s re-election, and while there may be some truth to it, the fact is that the situation has been and remains much worse than you’re being told by the media. We have been in a bottom-bouncing depression since at least 2009, and nothing has animated us very far from the floor. As I have written many times, they stimulate via the printing press and the deficit, and we get a brief improvement, but then the increased costs in the market come home to roost, and we’re set back to a place no better than before as the costs, driven in large measure by the inflationary effects of the stimulus that quickly act as a brake upon the alleged “recovery” that never materializes.

Elsewhere on Williams’ site, you can find a detailed examination of his treatment of unemployment, and the numbers will shock you. Add to this the tidbits about the deficit and inflation, and you will begin to understand how you’ve been misled, not only by the media and the administration, but also by decades of shoulder-shrugging politicians in both parties. By Williams’ assessment, it may be impossible to rescue our nation any longer.

Ladies and gentlemen, I have been urging you since the inception of this blog to make preparations to the best of your abilities. I hope you’ve been diligent. Check out Williams’ Hyperinflation report, and think it through carefully. The evidence of your own daily lives has been telling you all of the happy-talk about “economic recovery” had been a farce. Like the approach of a colossal asteroid, the government’s ability to hide the impending disaster or disguise the seriousness of our worsening situation has begun to fail. That is really the only significant meaning of the latest downgrade. They can’t hide it much longer. The Piper will be paid.

Some are choosing to ignore all of this in the hope that a change of administration might give us one last chance at a way out, but irrespective of the outcome in November, the chances that our currency survives three more years in its current form is probably fewer than one in ten. The possibility that we will survive as a nation may be somewhat less. Fixing this problem will require the institution of spending cuts on a scale that may cause complete social collapse. Do we expect John Boehner to take on such a monumental chore? Even if the Republicans take the Senate, Mitch McConnell isn’t exactly the picture of courageous and vigorous leadership.

Saving our nation is no longer simply a political problem in the sense of replacing certain politicians. It’s a cultural and economic crisis as well, and with all that is going on abroad, it may come down to a matter of literal survival. It’s time that we begin to face up to this, because our politicians aren’t going to address the problem until it no longer matters, at which point, they’ll do nothing, but we’ll pay the price. We always do. People have asked me what we could do to remedy the problem, but when I tell them, they look away, because they don’t want to face the implications that attend the proposed actions.

At present, we have an annual published deficit of around $1.3 Trillion. As Mr. Williams’ report makes plain, if the government were forced to use GAAP(Generally Accepted Accounting Principles) in their accounting, the actual annual deficit is in the neighborhood of $5 Trillion. The added $3.7 Trillion consists of new future obligations that the government does not pay, but has promised at some future date. Many refer to these as the “unfunded liabilities” of our government, but they add up to a staggering amount, in the range of $80 to $120 Trillion dollars in promises. When one makes promises on this scale, it is sure to affect one’s creditworthiness, never mind one’s credit rating.

Consider the fact that our government collects approximately $2.5 Trillion in taxes, fees, and the like throughout the year, but that this is still well short of the $3.8 Trillion it spends, and then propose cuts in response. Here’s a dirty, ugly secret the DC crowd won’t point out to you: If you cut everything that is not an entitlement program or debt service, you would still have a deficit. That’s right, if you eliminated every bureaucrat, soldier, judge, roads project, education expenditure, and all of the other things that government does apart from pay interest on its debt or send payments to individuals through entitlement programs, you could not balance the budget.

What this makes clear is that the problem exists not on the “discretionary” line of the ledger, but entirely on the “non-discretionary” lines in the book. Leftists will argue that the problem is the lack of revenues, but that’s an absurd hoax. Anything done to increase revenues at this point will actually cause them to decline. Increased tax rates? People will earn less to avoid the taxes. Even those who want to earn more won’t be able to because there will be insufficient demand in the marketplace to provide the commerce needed to generate the revenues we have now.

The only answer to this problem is sharp cuts in government spending, combined with a cessation of Quantitative Easing. The entitlement programs have become such a massive anchor on our economy that it cannot recover, and they have squeezed out all other spending. This is why people look away when you explain to them the problem. They know what it implies about all of our sacred cows in the entitlement sector of government. As with the old lament, everybody is in favor of massive government cuts until we arrive at their favorite Federal program. At that point, you are given a stack of excuses, complaints, and ultimately: “Never mind.”

I have news for you, and it’s not pleasant: These programs will end. Virtually all of them. None of them will survive in their current form, if at all. We are like Greece, only worse, and much larger. The question our elected leaders have not faced is whether to break the news to us now, while there is some small hope of recovery, or whether they shall just “get while the getting’s good,” and make off in the dark of night after the collapse, leaving us to figure it out. The fact is that I can’t blame them for opting toward the latter, because we will be worse than Greece in every dimension and measure, both in size, but also in degree, and I believe when a responsible politician ever tells this truth, he will be pilloried, at first in media, and then later by mobs. Paul Ryan has had just the first taste of this. Sarah Palin was mocked for such warnings to an extent I’ve never seen for simply stating the dangers of QE2 and all the money-printing. She was right, naturally, as is Paul Ryan on the matter of entitlements.

The problem is now that it may be too late for any sort of remediation. The problem has become too vast, and it is as late as that. What we can do as individuals is to grasp the reality laid out before us. We can prepare ourselves and our families. We can vote accordingly. We can make noise about it. In the end, we may be forced to watch our nation slide back into the pre-industrial, pre-republican muck from which it emerged. It’s been a long decline, and we’ve mostly done little but to urge it on as a people. We’re peering down the loaded barrel, and it’s been our finger’s twitch upon which we are waiting.

In the immortal words of officer John McClane, played by Bruce Willis in Die Hard, all I can say to Federal Reserve chairman Ben Bernanke is “Welcome to the party, Pal.” Bernanke is now warning legislators about the fiscal cliff over which Washington is shoving the United States. I must say that I have a few problems with this primarily because Bernanke has been leading us over a monetary cliff all his own. At the same time, I have a few other pointed question for Chairman Ben as he chides Congress on its lack of budgetary restraint. Why, at this late date, when we’ve all known this has been coming, is it only now that the Federal Reserve Chairman feels the need to show concern?

He certainly didn’t say any of this, or not loudly, when Nancy Pelosi was running the House. I also notice that he didn’t chide the President, who hasn’t taken any substantive steps to curtail the problem, and could be said to have arguably multiplied them with his stimulus bill(a.k.a. Porkulus) that unlike previous stimulus programs, wasn’t a single budget year project, but has been copied in each successive year. Bernanke can complain to Congress all he wants, but when this whole mess got started, he was nowhere in sight. For the first three years of Obama’s administration, he said nothing much to the executive branch on the matter, at least not publicly, and he said nothing of the sort to Nancy Pelosi and Harry Reid when they controlled Congress in one-party dictatorial fashion.

Worse than that, however, he has administered the greatest printing of money in Federal Reserve history, and it has all been largely inflationary as I have reported. Mr. “Fiscal Cliff” should have thought about all of this as he was digitizing more currency into existence, through QE1 and QE2, and more recently, a quiet QE3(by another name.) All of this quantitative easing really amounts to is printing more money, (or digitizing it.) That policy leads to the same cliff, because it is by his printing of it that it exists for the government to borrow and spend in the first place.

For Bernanke to come along now, conveniently after the House is in Republican control and to then waggle his finger is a bit of a sideshow act. Some will take him seriously, and the markets may react badly, but the truth is that he has been leading us into an even greater danger, and I think he knows it. This may be his way of making a preemptive strike for later this year, if the dollar crashes. He can point at Congress and claim: “See, I told you so.” The problem is that if tries that, I will be right here waggling a finger at him, to assure him that others, like Sarah Palin, have told him so. I have made this clear repeatedly, and yet Bernanke now comes along to warn Congress? Congress? He had better heed some warnings over at the Federal Reserve himself.

Don’t get me wrong: Congress is being as irresponsible as ever, but some in the majority party are at least trying to do something about it. For Ben Bernanke to come along and say this now suggests that he’s either seeking political favor with President Obama, who re-nominated him for his current second term, that ends in Janurary 2014, or he’s setting us up because he knows something bad is coming, and he now wants to disassociate himself from any blame. It may well be both. The sharp fall in gold prices on Wednesday may signal the beginning of a deflationary cycle. That could lead to a complete economic collapse, and Bernanke’s actions over the past four years have done nothing to remove the possibility. He can point a finger at Congress if he likes, but that means there are at least three pointing back at him.

Most have noted with disgust the rising price of fuel. In most places around the country, the price per gallon of regular unleaded is creeping up on $4.00. There has been some talk about an improving economy, but that’s mostly fluff. The truth is that our economy is in miserable condition, and as I’ve previously reported, the price of energy has the most immediate deleterious effect on our growth. As you look at the numbers for housing starts, as fuel ratchets up over $3.50, it begins to retard growth and investment. This happens because it affects every stop along the production chain, from the raw materials to final distribution, delivery or retail sales. Now that the price of fuels is driving markedly upward again, it is important to note the causes. The first is the inflationary policies of our government, and the second is a whole host of worries over the world supply of oil, now threatened by an increasingly hostile and vociferous Iran. These two factors threaten to drive prices over six dollars by summer’s end.

This would collapse our economy completely, and the only thing leveraging against it is that as prices soar, more projects will be canceled, and new construction will not commence, leading to a balancing reduction in demand. This natural signaling would not be so bad if it weren’t for the fact that our economy is already flat-lined. Anything that would cause a serious price spike at this juncture would likely ruin our economy for the immediate future, and might even push us off the economic cliff.

At present, the Obama administration is claiming unemployment numbers that are plainly rigged. What they have done is to discount people who have expended their unemployment benefits, but who still have no job, and they consider them to have disappeared from the job market. More, they’re started lop off people who have attained a certain age, and now consider them retired, thus removing them from the work force. In short, they’re rigging the outcome of the quotient by reducing the number of people in the job market in statistics only, as many of the people they have excluded are still actively seeking work.

If the current rise in energy prices continues, it will put a downward pressure on economic activity. As we’ve seen in each previous instance when this administration has claimed the economy was in recovery, the rise in fuel prices will tend to knock down the recovery. An economy cannot grow with a shrinking pool of energy resources, and this president knows it, or should. This is why such actions as the denial of the construction of the Keystone XL Pipeline was so astonishing. The construction alone would have provided tens of thousands of jobs with decent wages, and it wouldn’t have been very long before we would be receiving the Canadian oil at the distant end, proposed to have terminated in Texas, in the refining centers along the Gulf Coast.

The presumably short-sighted thinking of this administration is so baffling that many have begun to conclude this is all by design. What is clear is that we will not truly begin a recovery until energy prices are brought down by the government standing aside as the primary obstacle to energy development. The federal government under this president has been pushing various “green jobs” initiatives that promise much, but have delivered very little, either in the way of job, or in the production of energy. The scale of the problem is gargantuan, and no collection of windmills or solar panels is going to do much about it, but worse, since these are still not economically viable models, they actually waste money.

The immediate future of American energy production is weak, because we have a president hostile to the various forms of energy most Americans for the near-term future will employ, in the forms of coal, gas, and oil. The problem is that these still represent the bulk of American energy production, with coal-fired power plants still accounting for at least half of all electric generation in the country. Worst of all, Obama’s EPA is shutting down coal-fired plants, as three more plants are scheduled to be shut down this year in Texas. Texas may see a summer of rolling black-outs that will have been the product of these mandates, and there is no way to build an economic recovery in that environment.

Be prepared to see fuels to continue their uphill climb through the spring, and as they do, you will see a repeat of the pattern we have seen numerous times over the last four years. As energy prices increase, any alleged recovery will falter. It’s the unavoidable result of a policy that has set us up for repeated failure. With the monetary problems in Europe, however, it threatens to be much worse.

There’s a new report by CNBC that the Federal Reserve is considering some more “quantitative easing,” also known as “firing up the printing presses.” They’re going to make money cheaper again, and when it’s cheaper, it’s necessarily worth less. For those of you who don’t really follow how all of this works, let me remind you of a few things I’m sure you’ve heard, but which you may not pay much ongoing attention. The idea is to try to stimulate the economic activity by putting more cash into circulation, theoretically making it easier for banks to loan money for new home construction, businesses, and all manner of things. The notion is that with more cash flowing, more economic activity will result, and more jobs will be created. That’s the theory, and it sounds simple enough until you recognize some complicating factors.

First, every time the Federal Reserve follows this procedure, what’s really happening is that for all intents and purposes, they’re flooding the economy with new money. There’s really no new value being added to the system, so what this effectively accomplishes is to devalue all existing money by some amount. What this causes in turn is a diminution of your money’s purchasing power. A loaf of bread costs $1.20 instead of $1.10, or a gallon of gasoline goes from $3.50 up to $4.00, or a 2″x4″ down at the home improvement store goes up in price, but the total effect is that money is less valuable.

Back when QE2(Quantitative Easing, Round 2) was announced, back in late 2010, Sarah Palin came out and warned against it, and was scoffed at by the geniuses who push this inflationary policy upon us. Of course, with predictable regularity, she was right about it, as we who pay attention knew would be the case, so now the Federal Reserve is considering more of the same. As with last time, most of the inflation has been hidden by the fact that amazingly, energy and food are not counted in the CPI(Consumer Price Index) but of course, that’s an absurdity since it’s where much of our spending is concentrated. This helps the politicians and the Federal Reserve shield from your eyes the true cost of their stimulus, but what you should know is that it amounts only to a delaying tactic. What they’re hoping is to buy time until the economy can somehow catch up, but the problem is that the policy they’ve undertaken ultimately leverages against that end, since it will take ever more dollars for you to fund your energy and food costs, and those aren’t things on which you can really do substantial trimming if you intend to go to work each day.

The whole thing is a colossal fraud, and it’s one of the reasons I agree with Ron Paul that we need to re-examine the role of the Federal Reserve. It’s become obvious that they’re just as willing as most politicians to lie to you about the end result of their policies.

This has to be one of the most ridiculous pronouncements made by a governmental body in some time, not because it is inaccurate, but because they’ve apparently just now taken notice. YahooNews is reporting that the IMF’s worried about the global economy, and it’s new head, Christine Lagarde is pointing out the problem as a “crisis in confidence in public debt.” No, really, she said this. (For her next trick, Lagarde will likely tell you the sky is blue and that the sun rises in the East, while she’s giving out revolutionary information.) What Lagarde doesn’t mention is the IMF’s role in all of this, and the fact that the grotesque amounts of public debt have been augmented by loans from the IMF itself, in propping up all of these nations. This is much in keeping with the failed policies that have threatened the world economy, but rather than re-think the strategy that has only deepened our troubles, Lagarde criticized nations that seek to shore up their own economies and financial markets, and while she didn’t name names, it’s clear that she’s talking primarily about the British. She offered this:

Part of the problem, she said, has been national calls for protectionism, making it “difficult to put in place international coalition strategies against it.”

Lagarde added: “National parliaments grumble at using public money or the guarantee of their state to support other countries. Protectionism is in the debate, and everyone for themselves is winning ground.”

Let me translated Lagarde’s lament: Politicians in much of the world (excepting perhaps only the US) are beginning to heed the voices of their people, who are beginning to demand that their politicians begin to look out for their own nations first, before worrying about the sovereign debt crises of others. So Britain, for instance, that is doing the smart thing and walking back its relations with the European Union and its failing currency is a bad country, while we in the US who continue to shovel dollars into the IMF via the Federal Reserve are “smart” and “thoughtful,” and the rest of that patronizing tripe that only works on liberals and statists. Meanwhile, those of us who live in Realityville, USA, are beginning to understand that this crisis is largely the result of bad ideas promulgated by statists the likes of Christine Lagarde.

This announcement is an insult to every thinking person on the globe, and it show just how far these people will go in order to prop up a lousy idea, or a whole play-book full of them. As if this wasn’t bad enough on its face, Lagarde offers still worse advice by way of a warning:

Emerging countries, which had been growth engines for the world economy before the crisis, have also been affected, said Lagarde, citing China, Brazil and Russia.

“These countries, which were the engines, will suffer from instability factors,” she told the newspaper.

In other words, these countries that have all seen burgeoning exports are now beginning to contract because general consumer demand is down in the importing nations, including the US and the EU. In short, Lagarde doesn’t want you to notice that she’s making an admission about the future prospect of the EU, with its currency in turmoil, and the US, where currency in large amounts has been sent to prop up this entire mess. What she doesn’t say directly, and dares not admit, is that the coming collapse is already beginning in a more serious way, measured in the GDP of what had been the leading growth engines prior to the onset of the financial crisis.

In short, Lagarde is asking, or even chiding countries to continue a policy that is nothing short of suicidal, all on the basis of the proposal that the IMF be provided more money to loan to nations already deeply indebted. This is both the financial and moral equivalent of urging the family with twice their annual income in short term debt to apply for another credit card or two. What she is pretending is that the situation can be repaired by some notion of restored confidence among investors and consumers who now [rightly] fear that nothing but collapse lays along this road.

They’re right to doubt, and the people of Britain and every other nation are right to worry as what Lagarde seems to be suggesting to European politicians, but indeed politicians everywhere, is that they should take one for the team, not as politicians, but as sovereign nations. Britain would be right to reject her words as the ravings of a con artist, selling the same old Ponzi scheme again and again. We in the US could only improve our position by following the British lead away from the EU, and the Euro, but our current financial and political leadership is instead tying us more closely to it.

It’s time to face reality: The Euro was a doomed currency from the outset, and inviting in those nations with questionable currency and dishonest fiscal policies was never going to make anything but a disaster, but the people of Europe were suckered into it, and now the US is going along. Their shrill warnings of dire collapses if we don’t go along are merely a postponement of a greater crisis with each subsequent delay. It’s time to face the music, and as the old saying goes, we must refuse to put even more good money after bad. So bad is it now that it would be more accurate to say that we are putting bad money after even worse.

The only way to prevent a global collapse is to cut our losses now. Stern fiscal policies must prevail, and money must grow tighter. At this very moment, at the US Treasury and the Federal Reserve, they’re concocting plans to export your future wealth to Europe in order to buttress a currency that won’t be saved, and each dollar they pour into the effort only devalues the ones in your pockets. It’s time to put a stop to all of this, and if we’re to save our country, we must start here, and we must start now, and short-run extensions of payroll tax-cuts won’t get it done. We need real, drastic spending cuts that sharply curtail our budget deficit, something on the order of what Ron Paul is proposing, in the realm of one trillion dollars or more in spending cuts immediately. If you want sound currency, it has to start at home, and whatever else you may think of Ron Paul, he’s right about this.

Santa Claus may be visiting Paris this Christmas, but it looks as though he’ll be dropping a lump of coal in President Sarkozy’s stocking, as reports are now widely circulating that Standard & Poors may issue a credit downgrade for the government of France in time for Christmas. In truth, this is no laughing matter, and it certainly portends ill tidings for the season, as the financial markets, already in turmoil over sovereign debt issues, and the imminent collapse of the Euro are on the verge of panic. Much like the downgrade that was issued for US government credit-worthiness, this seems to be bound to the failure to create a workable solution to the budgetary woes and general unsoundness of the fiscal policy of Eurozone member states.

In a report in the American Thinker on Friday, the details of the failure to attain a workable agreement for consolidation of fiscal policy among member states is outlined. According to that report, the rating agency Fitch is now considering downgrading Germany and other Eurozone members as they look at the increasing probability that no fiscal order will be brought into this situation.

This sets the stage for a new phase of the Eurozone crisis, where we may see the beginning of one-wide collapse. As I have reported in recent weeks, the looming catastrophe will have been due to two primary causes, and they are nearly impossible to overcome at this late date: The nations of Europe that created the single currency overstated the value of some of the previous currencies to an outrageous extent, meaning that the Euro was destined from the outset for failure. At the same time, there was no consolidation or enforcement of a unified fiscal policy for member states, so that those countries with already high debt ratios and generous welfare state benefits as well as remorselessly unconscionable retirement programs for government employees virtually guaranteed that there would be a collapse in some form. As with all such situations, government officials always seek one more postponement of the inevitable, but such a piper will not go unpaid.

What makes any and all of this relevant to we Americans is that our government and our Federal Reserve have tied us to the Euro to an extent that threatens to take us down with them. If the Euro goes, we will face some sort of financial calamity, and because some Euro derivatives have now been backed by FDIC, it places the American taxpayer on the hook should this all go belly-up. Add to this the trillions of dollars already loaned under the auspices of TARP and other bail-out programs administered by the Fed, and what you have is a scenario by which we are dragged down, cannibalized on behalf of our friends in Europe.

Our other increasing similarity to debt-ridden Europe is our debt-to-GDP ratio, all in the furtherance of the growing welfare state. During Barack Obama’s thirty-five months in office, we have added to our cumulative National Debt by something in the neighborhood of $4.5 trillion. For the first time in our nation’s history, debt now exceeds GDP. At this rate, we will soon exceed the likes of Italy, that has now a debt of more than 120% of GDP. At this point, the Obama administration in concert with the Federal Reserve is fighting the same sort of delaying tactic that the Eurozone is now employing: Prop everything up through just one more election. This is ever the tactic of politicians, who seek to maintain power in the face of calamities they have created. None of these heads of state are telling their people the truth, or preparing them for hardships that now loom in a very uncertain future. In part, they will offer that they do not wish to create undue panic, but in truth, they do not want to face their electorates’ anger.

Governments ought to have some responsibility to tell their people the truth, even when that truth is terrible and threatening. The actions of the Eurozone leaders are despicable to me for precisely this reason, because they are telling their people that it will be worked out, somehow, but by now, I think most people have begun to catch on, both in Europe and here at home. What politicians fear most is having to tell their electorate “no,” or worse, “no more.” Politicians rightly understand that through their relentless building of massive welfare states, they have created monsters that will soon threaten their creators. There’s a history of reprisals in Europe, and one can only hope it doesn’t come to that.

We’re well past the end of the efficacy of such charades as the one the Federal Reserve is now undertaking. With Europe’s currency on the verge of collapse, Standard and Poor’s has put 15 European nations on negative credit-watch. Worst of all, the Federal Reserve sees the threat to financial stability, and rather than moving to protect the American people, our own monetary agent is instead moving to shore up the Euro via the International Monetary Fund (IMF). Every American should be incensed by this move, because what it really offers is an international version of “too big to fail.” The US has become so entrenched in the future prospects of the Euro currency that the Federal Reserve now believes bailing it out may be the only way to save ourselves. If this sounds vaguely familiar, it should, because this is the same basis by which the American people were suckered into backing up and bailing-out those banks deemed “too big to fail” back in 2008 and 2009, under Presidents Bush and Obama, respectively.

Readers may remember a few weeks ago that I reported the swindle being permitted by Treasury, where Euro-based derivatives were now to be backed by the FDIC. That risky scheme actually puts American tax-payers on the hook for hundreds of billions of dollars. Our Federal Reserve has already lent more than $7Trillion to foreign banks, and now it seems they’re intent upon providing still more. It’s an obscenity that at this late date, we’re still pursuing a failed policy that puts bad money after worse money. Why? Simply put, we are so thoroughly invested in the Euro experiment that if we simply walk away, it will fall, and likely take us with it. The problem is, as I’ve previously explained, that one cannot save the Euro by this method. There is only one way in which the Euro might be saved, but it will require something the European people likely will riot to oppose: Vastly more effective fiscal control.

To approach this problem will require that which governments virtually never do: Restrain spending, while giving up some controls over the economies of their respective nations. It will require that they cut social spending, but also government employment dramatically. That’s where the real problem begins, because people now long-accustomed to a vast and prolific welfare state do not give them up without a fight. Of course, give them up they will, one way or another, when their system ultimately collapses.

We’re not much behind Europe in that development, and our own credit-rating downgrade earlier this year was simply the beginning. We face the same choices, although still less severe. Unfortunately, by entangling us with the Europeans, what the Federal Reserve and all of those banks deemed “too big to fail” that have been major players in the Euro-zone, what this means is that it will accelerate our own collapse. We may even go down, not following behind Europe, but holding hands and walking side-by-side with them over the precipice.

It’s anybody’s guess how long this can be extended. It’s possible we might not make the end of the year, or the end of two years before this collapses, but with the direction in which we’ve been heading, collapse seems to be inevitable. The one and only saving grace America may have, as distinct from Europe, is a healthy sense of charity by comparison. Americans remain, even in our current economic distress, the most giving of people. If we are finally forced to confront out own welfare state, there may be some hope that the nation will find some way at least to feed its people, but for Europe, I have no such hope.

Over the last week, I’ve been watching events unfolding with growing concern, and while I truly hate the idea that I might inadvertently offer myself up as just one more “Chicken Little,” I must in all candor tell you that because the sky is not falling now, do not assume it will not fall tomorrow. We’ve listened to the media talking heads, the pundits, the analysts, the economists, and even the politicians, and virtually all of them have made rosy predictions and hopeful prognostications for the immediate future, and your federal government feeds this view with its own phony numbers, endlessly amendable and adjustable statistics, and a common lie that consists of telling you: “It’s all going to be just fine.” As I’ve reported to you within the last few weeks, more downgrades were coming, and banks moved Euro liabilities under cover of FDIC, but now the downgrades are here. There will be more. When the Euro falls, it may very well take the United States with it. The time to prepare has very nearly expired, and there will be no turning back.

Ladies and gentlemen, I am now going to tell you the truth, and I will place no bunting of red, white and blue around it, because you deserve to know it all lest you be left penniless and homeless and starving in the streets, unable to defend yourself from the cold, never mind the brigands that will likely swarm our cities: If the Euro collapses, the blow-back may not merely damage our economy, but thoroughly destroy it, and there is absolutely nothing we can do but deepen and worsen the results by more delaying tactics. Businesses are scrambling to come up with options if the Euro collapses, but the truth is that many of them are now in a position from which they will not recover. The choices you make now may mean the literal life or death of you, but it’s important that you know how we arrived here so that if ever there is a chance to arise anew, you will already know the answer. Even now, the statists of Europe are seeking ways to loot you. One world government will come riding in on the back of this nightmarish trojan horse.

It is a truism that few wish to acknowledge that one cannot consume more than one produces without eventually becoming subject to the sort of collapse we now face. It goes for nations as well as people, and just as people can hide the growing disparity between their financial underpinnings and their lifestyles for a time, nations can do so, and for even longer and to a greater degree because they can pilfer the value of the few still producing among their citizens. The problem is that just like individuals, even nations and unions of nations run afoul of nature’s basic truism requiring one to produce at least as much as one consumes. Herein lies the sickening truth of the impending Euro collapse, and the collapse of all those who have tied themselves to the Euro, including the United States. For far too long, far too many of us have lived without producing while others camouflaged their bankruptcy, willingly or [more often] unwillingly carrying their burdens. No nation can survive that. No people can sustain that.

The single currency of the European Union was advertised to make them more competitive as a trading bloc with the United States and Asia. In truth, that’s not the whole story. The Euro was also devised as the means by which to buy a little more time before the welfare states of Europe failed. No rational person ever thought otherwise, and every politician from Rome to Madrid to London to Paris and Berlin has known this for two generations or more. Your politicians right here in the good ol’ US of A have known it too, and yet when they had a chance to do something to change it, they instead accelerated it. You might ask: “Why?”

The answer has ever been the same, and it is the endless pursuit of power at the cost of any and every principle. This ambition has blinded mankind almost from the very start of the first civilizations. In our modern society, if you think politicians are the greatest bribe-takers, I urge you to think again: Modern politicians are the greatest source of offers in bribery but the greatest recipients are we the people. You wonder who is guilty? He who offers a bribe is powerless in the face of rejection, but he who accepts that bribe is guilty for all his days. In small increments, and in bits and pieces, the people of Europe were convinced to surrender their liberty in exchange for small bribes. Over time, the bribes became so large that to maintain them demanded more and more from the producers, until the relative few producers began to join the gravy train. While they bribed your silence and your complicity with the get from your neighbors’ pockets, be assured that they have been busily lining their own.

The Euro was concocted to hide this. All those nations whose fiscal problems are now manifest have always been unstable, and it’s because successive generations of politicians in those nations have been carrying out this sort of bribery of its citizenry from time immemorial. The French revolution was a Marxist affair, though not known by that name in those days, and nations such as Greece, Italy, and Spain haven’t been fiscally responsible for centuries. The disease is not heritable, but it often visits subsequent generations, because it is born of a bad idea that is passed from one to the next. That idea is statism. Statism is the ruin of mankind, and always has been, because its fundamental claim is that man exists to serve the state before himself. Whether statism took the form of Monarchy, Theocracy, Democracy, or some brand of Totalitarianism, it has ever been the bane of human existence, and yet no idea has more staying power among people than this one. It plays upon one of mankind’s greatest weaknesses: The temptation of covetousness and envy, born ever of sloth. It is enabled by the deadliest sins against nature, or nature’s God. It offers the false promise of a life without discomfort, effort, or pain, but in the end, it returns only misery.

A little more than a century ago, this idea began to catch on even in America. It has slowly grown as a cancer, and it has spread its tendrils through every community, on every level, and in all things. We’ve been hiding it, too. This disease has its own fuel, and the Federal Reserve provides it, and not surprisingly, has been providing it for most of the time in question: Easy money. Low interest rates and plentiful credit has made this possible. Consider the individual who runs up a pocket-full of credit cards, and struggles to make the monthly minimum payments. That’s our nation. Just as a weak-minded, or necessity-driven person can quickly run into debt to a dangerous level, so too can a country, and just as the easy availability of credit can act as an inducement for an individual, so does it work as a great temptation to nations. Nations fall when they permit politicians to bribe them with credit. Look around you: How many votes have been bought by a budget that is nearly two-thirds entitlement programs?

As has been reported this week, our own Federal Reserve loaned out over $7 Trillion at impossibly low interest rates. That’s half the GDP of the United States, in loans. Yet you may rightly ask: Where does the Fed get the money? Answer: It loans it into existence, i.e., it prints it. Only the promise of the debtor to pay gives it any value, but if that debtor defaults, well, the value of the dollar is diminished accordingly, but even if the debtor makes payments, there is always risk attached, and that risk is shown in inflation. This is why the Credit rating of the US Government has been such a big deal: It is the single largest debtor, and substantially so. As our government looks less and less likely to be able to repay its debts, while it continues to borrow money at an increasing pace, what do you suppose will happen to the value of your money? Why did Thanksgiving dinner cost an average of 13% more this year than last? Next year’s will cost 20% more, or worse.

This is the real truth of this situation, and unless and until you are ready to confront it, and to reject the myriad bribes from politicians, you are going to see things grow much worse. Perhaps most frightening, they may have successfully engineered not only the collapse of the Euro, but also the Dollar, and every other major currency on the planet, but what they will offer as a “fix” is a global currency that will make of us all slaves to the same masters. They will offer you more bribes, or at least threaten to take away the ones you currently enjoy, all so you will go along.

Ladies and gentlemen, make no mistake about it: With the current crisis ready to explode in Europe, and with the state of our own economy, under the willfully absent leadership of Barack Obama, we are waiting on the edge of collapse. This may be a most un-Merry Christmas, and it only promises to worsen. If we somehow survive as a nation, it will be surprising, but it will only have been possible if we reject calls for a global currency even at the expense of the bribes we are now so accustomed to taking that we believe them to be our entitlements. From now until then, you can spend your time in contemplation: Do you prefer life as a slave? Many of your neighbors will say “yes” without flinching. Somehow, somewhere, we must find the strength to say “No.” Prepare, my friends, and by the strength of your preparations may the republic endure.

It’s possible that I could be wrong, but something about what’s happening in the economy leads me to suspect that despite the rosy prognostications of Government bureaucrats, and the even rosier hopes of some market analysts, I don’t think the improved GDP growth numbers for the third quarter are going to mean much for the long-term health of the economy. For one thing, the government has had to revise every quarter downward as they adjust their numbers to better fit reality. These first numbers are raw at best, and propaganda at worst, and may bear little or no resemblance to what is actually going on. For another thing, I’ve noticed a trend, and I suspect you’re going to notice it too. Fuel prices fell with the ugly end of summer, and they’ve recently begun to tick up anew. I suspect this will tell us the direction of the economy in two months or so, if history is a guide.

As I have discussed at length before, our economic prospects are linked to many things, but few are more important to growth than the price of energy. Through the first half of October, gasoline prices fell at the pump because the economy was doing poorly and producing few new businesses. By mid October, the price decline suddenly reversed and we watched the cost per gallon begin to tick upward again. As I have explained ad nauseum, once the prices tick back past the $3.50/gallon boundary on gasoline, or the $4.00 threshold on diesel, you can expect the temporary increase in growth we saw in the end of the 3rd quarter begin to be choked off.

There is always a lag to these things, but what should have offered you the tip on the economy’s underlying condition was when fuel prices began to decline well before Labor Day weekend. That’s a sign of a struggling economy, all else being equal, and it should have been noted with trepidation. I knew the numbers for August were going to be abysmal long before they eventuated. The price of fuel continued to slip, but some time in the last part of the third quarter, we saw a turnaround in growth. The reason is simple: With the prices of fuel in decline, economic activity increased, consumers had more to spend on other things, and we saw a brief uplift. I suspect that as this little bubble grows, the prices of fuels will follow. As they reach higher, they will begin to suck all of the oxygen out of the economic room, once again. When that happens, well, you know the rest.

At the same time all of this was going on, Texas was seeing record heat and a continuing drought(that persists for most of the state even now.) In that period, Texas began to experience rolling brown-outs, and threats of them, as our once enviable electrical grid could no longer support the demand. We’ve had to shut down a number of coal-fired power plants in Texas due to EPA regulations, and with no new plants to replace them, and more plant closures almost certain in the coming year, the prospects are going to worsen. Barack Obama’s obsession with the elimination of coal-fired plants is going to be the death of Texas, but hey, Texans didn’t elect him anyway, so why should he care? This political aspect aside, Rick Perry has been somewhat successful in getting some companies to relocate here, but they’ll find it difficult to function when they can’t turn the lights on.

At the end of it all, it was her superior understanding of this particular facet of the economy that had made me most hopeful Sarah Palin would run for president in 2012. Most politicians are blissfully ignorant of how thoroughly dependent growth is on energy. They will soon discover it if Obama has his way.

Now comes some very realistic analysis to which you should pay close attention. Despite all the assurances of impending improvement, and the ostensibly good news of last week’s Euro-deal, you should still prepare for all of that to collapse. As Liam Halligan reports in the Telegraph, this deal, this latest round of bail-outs offers not much hope of failure. As he rightly points out, with all of these government bail-outs, the natural signaling in the free-market is short-circuited, which means people take actions based on conditions that are largely ore even entirely artificial. It’s much like Treasury forcing all banks to take TARP money during the crisis of 2008, because they realized that by giving assistance funds to some banks, but not to others, they would be signaling which banks were in trouble. Rather than permit depositors to draw their own conclusions, and make rational choices, what they did was to intentionally obscure which banks were healthy and which were not. This sort of tinkering is part of what got us here from the outset.

Halligan’s basic warning boils down to a suggestion that the prideful Euro-set will not accept, but is nevertheless the best advice he could give them: Let Greece default, openly, and boot them from the Euro. Dump Portugal too, says Halligan, because as he points out, it is “absurd” to think of Portugal as having the same monetary stature as Germany. This is what you get when politicians interfere in the markets: Unbridled chaos and fakery, and this is what we are now experiencing. When the Euro-deal fails, as it almost certainly must, Wall Street and markets around the globe will lose all the value they’ve gained in recent weeks, and then some. Mr. Halligan concludes as follows:

“The eurocrats, of course, lack the guts to trim back monetary union to a more manageable size. Too much face would be lost. So “euroquake” fears, once viewed as outlandish, are gaining pace. Despite Thursday’s deal, and all the reassurances of a “durable solution”, the Italian government on Friday paid 6.06pc for 10-year money, up from just 5.86pc a month ago and a euro-era high. Such borrowing costs are disastrous, given that Rome must roll-over €300bn of its €1,900bn debt in 2012 alone. A default by Italy, the eurozone’s third-biggest economy, and the eighth-largest on earth, would make Lehman look like a picnic.”

“The eurozone must be consolidated. World leaders should similarly force European banks to disclose their losses, we all take the hit and then we move on. Instead, we are served-up, in ever more complex variants, the same “extend and pretend” non-solutions. It gives me no pleasure to write this, but I give this deal two weeks.”

Indeed, what Halligan predicts looks bleak, but as he reminds, it needn’t be the case. Just like in our own domestic policies, this is being done by people who are largely ignorant of the workings of markets and the conditions that drive them. The problem is, they always do what politicians have done since the first elections on record: They kick the can down the road hoping for one more postponement. There w ill come a day that such tactics will offer no further hedge, and I suspect it will be sooner rather than later.

In the UK’s Parliament, David Cameron is trying to stave off a revolt of the conservative party, as at least 60 members are aboard with the idea of putting up a referendum on leaving the EU. As a way to head them off, Cameron is hoping to exact some EU treaty re-writes that will return some autonomy to the UK in the matters of social laws and employment. At the moment, he doesn’t seem to be making any headway, and a revolt against his proposal seems likely. At the same time, French President Nicolas Sarkozy has told Cameron that he’s sick of the UK telling the rest of the EU what to do, since the British “hate the Euro.” If you haven’t figured out what’s at the root of all of this, let me help to explain: The EU is on the brink of complete and utter destruction, and the Eurozone is likely to fails, since neither Greece(immediately) nor Italy(just over the horizon) seem likely to stave off default on their sovereign debt. Yesterday, I related to you the story of Angela Merkel of Germany chastising Italy over its debt-to-GDP ratio, as she’s looking over the immediate horizon and can see the trouble brewing in Italy, but now France has joined in the pressuring of Italy. The EU is in deep trouble just now and it looks like the beginning of the end.

Some see this as empowering the US, but any such bubble will be short-lived, as while power in Europe is likely to become decentralized in the short run, in the US, a collapse of our markets and our banking system may not be too far away as I reported Saturday and Sunday. Our current state of economic and financial affairs leverages strongly against any lasting leadership role, because we’re in debt very nearly on par with Italy, and if we fold, the rest of the world will follow. The problem at the moment for the US is that we’ve stuck our necks out on behalf of the Europeans via the Federal Reserve and the International Monetary Fund to an extent that we are now firmly tied to their fate. If they fall, so will we, but the question remains: How far, and how fast?

If we had wise political leadership, they would demand that we stop sticking our neck out on behalf of the Eurozone. Yes, if they fail, it will hurt us too, but the more we increase our stake, the greater our eventual losses, and the greater the damage will be here at home. If the EU winds up dissolving at some future date, it will be a potential boon to American economic might, but in the short run, it will have dire effects on our capital markets. The point to be understood is that I can’t imagine a way that Europe fetches this one from the fire, as the UK’s reluctance signals. If the British do not wish to stick their necks out, I can’t imagine a reason on Earth that we should be so-inclined.

Domestically, we have weak leadership in the only House in government that would be able to stop any of our further involvement. John Boehner’s not going to stick his neck out in opposing what’s being done with the European derivatives from the Bank of America and JP Morgan, just as he wouldn’t stick his neck out over the debt ceiling negotiations. In the end, Boehner will capitulate to the Democrats just as he did in July, and much like David Cameron is having to do with members of Parliament in London, Boehner will be trying to herd his members in Washington DC who can see the elections of 2012 directly in front of them, and know they cannot support these kinds of deals any longer.

What all of this is likely to mean on Wall Street at the open on Monday is anybody’s guess, but one thing’s for certain: The volatility we’ve been seeing these last several months is likely to continue, and one of these days very soon may be the worst day on Wall Street in 80 years. I’m not trying to instill fear or panic, but I want you to know what’s going on in the world around you. With Europe on the brink, the Middle East ablaze, and our own nation in a severe downturn, it’s only natural to wonder when the bubble will burst. Washington has been trying to conceal all of this from you for so long that I think they may have forgotten it’s fake. You can’t support the markets with direct injections of cash as was done through TARP, the bail-outs, and QE2 without eventually arriving at the day when it all goes belly-up. Having been linked to Europe so thoroughly, we are more vulnerable than ever. Our political leaders have neither the competence nor the will to extricate our nation from the grip of a global calamity. In the case of at least one individual, I believe it’s being engineered. Prepare, ladies and gentlemen, prepare.

“We expect a moderate slowdown in the beginning of next year, as two small policy shocks—another debt downgrade and fiscal tightening—hit the economy. The “not-so-super” Deficit Commission is very unlikely to come up with a credible deficit-reduction plan. The committee is more divided than the overall Congress. Since the fall-back plan is sharp cuts in discretionary spending, the whole point of the Committee is to put taxes and entitlements on the table. However, all the Republican members have signed the Norquist “no taxes” pledge and with taxes off the table it is hard to imagine the liberal Democrats on the Committee agreeing to significant entitlement cuts. The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan. Hence, we expect at least one credit downgrade in late November or early December when the super Committee crashes.”

At the same time Germany’s Angela Merkel is chastising Italy over its debt of 120% of GDP, I wonder if she’d do us a favor and look at the US, which isn’t far off from that ratio itself, and tell Obama a thing or two while she’s at it. Merkel is among those who are urging further austerity measures, and she’s right. The trouble is that leftists never tire of pitching their best Keynesian plans at these sorts of problems, pretending that if only they can borrow and print a little more liquidity, the problem will solve itself. Naturally, that’s nonsense, and while everybody knows it, the spenders will never, ever admit it.

Ladies and gentlemen, we stand on the precipice and wonder why this is happening, but anybody who has ever learned the hard lessons of running on credit must begin to see the simple truth of the matter: You cannot consume more than you produce on an indefinite basis. This entire fiasco is the result of runaway governments spending our future into oblivion. While we’re at it, we must also rein in the Federal Reserve as the policies now in force are merely multiplying the trouble. One year ago, as they began to plan out QE2(Quantitative Easing, Round 2,) Sarah Palin warned the world. She was mocked by Krugman, the purveyor of Alien Attacks and other nonsense dressed up as economics, while she was being berated for her stance by a host of others, but in the end, who has been right? We mustn’t permit ourselves to suffer under this comfortable illusion any longer: There is no alternative but to dramatically slash government spending. We must do it now, or there may be no tomorrow.

To understand what’s been done, and how, we need to first understand a bit about how money is created. In a simplified model, the Federal Reserve loans money into existence. The Federal Reserve loans the US Government money and the bonds thereby created are sold on the open market to buyers. These bonds are traded globally, and this is why and how the Japanese and more recently, the Chinese, have come to hold so much US debt. Of course, you can buy bonds too. So can banks. It’s seen as an investment, but with interest rates maintained artificially low, the desirability of the bonds on the market slips dramatically.

We no longer base our money on an objective store of value. Many people reference the end of the Bretton Woods agreement under Nixon, but the truth is that we really came off any reliable, meaningful gold standard under Franklin Roosevelt. Roosevelt arbitrarily set the value of the dollar vs. gold by picking random numbers from within a range, pulling numbers out of a hat, drawing cards, or whatever else he dreamed up at the time. (See: “The Roosevelt Myth” by John T. Flynn)

The Bretton Woods agreement merely formalized the process in 1946, but it continued the basic FDR policy: You, as a person subject to the jurisdiction of the United States, could not redeem your dollars for gold. A foreign bank or government could. By1971, your treasury was emptied and Nixon was forced to announce that we could no longer even redeem dollars held by foreigners with gold. For the period between 1933 and 1971, we functioned on a fake gold standard that was propped up by functioning like a gold standard internationally, but domestically, as pure fiat currency. In short, here at home, what we had was monopoly money, but it looked and spent normally because in the international markets and exchanges, where somebody would quickly notice and complain, the money was backed by gold, until the gold ran out. Most of the gold formerly held by the United States was long gone, to pay foreigners when they presented dollars obtained in trade for redemption. It is literally gone. Only a relative token of that gold survives.

So what gives your money value, if not gold? The answer is simple: It is the confidence of the bond-holders in the debtor’s promise to pay. Imagine you purchase a home. If you were borrowing the money, you would of necessity need to find a bank willing to lend it to you. If they saw you had no job, no business, and no assets, you were a poor credit risk, and you’d not get the mortgage. Mortgage companies trade mortgages, just like bond-traders trade bonds. Debts are basically investments based on the value of the interest due. The investor is betting that inflation will not surpass his earned interest on the mortgage, and therefore, will profit slightly as the mortgage is paid in full. Mortgages with higher interest rates can be better investments, but traditionally, they implied more risk because people tend to get mortgage rates based at least in part on their credit-worthiness.

The value of the US dollar is determined in much the same way. The currency is backed in part by the assets of the people who owe money, and in part by the confidence bond markets have in the probability that as the bonds mature, they will be paid in full, with the expected interest.

Now that we know all of this, and with my apologies to all who already did, let’s get on to the meat of this. Barack Obama, the Congress, and the Federal Reserve have been stealing you blind. Over the last three years, the Fed has lent more money into existence than in all the time since WWII. The Federal Government has been the borrower of record, with the total debt incurred by the Congress and President Obama in that period exceeding four-and-a-half trillion dollars. That’s $4,500,000,000,000.00. It’s a lot of cash. The problem is, the economy in no way produced nearly that amount of additional wealth in that period. The effect is simple: Each and every dollar, the new ones and all the ones that existed beforehand, fell in value. This is engineered inflation, or what the Federal Reserve has taken to calling “Quantitative Easing,” which is a fancy way of saying that they’re digitizing or printing more monopoly-money dollars that will go into circulation with the rest of the dollars, and thereby devalue them all.

Now, we could delve into the why and how, but it’s much more important, I think, to show you a simplified illustration of how this is being done. I’ve created a few charts here to help illustrate how this works. I’ve simplified it so as to promote understanding, but I am going to explain what you’re looking at, and when you’re done, you can draw your own rational conclusions.

In the first chart, we are starting at day zero. On this day, a dollar is worth a dollar. There are a total of 400 in circulation, and they are distributed as shown. I assume that on day zero, a gallon of gasoline costs $2, and a loaf of ordinary bread costs $1. This is the baseline. You may wonder who is Person 1 , Person 2, Person 3, and Person 4. For the sake of argument, however, we’ll get back to that. Also notice the purchasing power. Notice how many loaves and gallons each person can buy. Take a look at day zero(You can click the image for a slightly larger version:)

Now remembering that there are $400 in total, let’s imagine the Government borrows another $200 from the Federal Reserve, and the Fed must borrow it by issuing bonds. Now there’s a total of $600 in the economy. The Government takes the newly printed/digitized dollars and distributes them, $50 each, to all four persons. There is no new value in the economy. The money’s value has dropped by 50%. Expressed another way, the money is now worth only 2/3s of what it was worth on day zero. Let’s call this day one, and take a look:

As you look at the chart above, you immediately notice that the distribution of wealth has changed. Person 1 and Person 2 have both picked up their share of the wealth. Person 3 has lost a little, and Person 4 has gotten clobbered. Notice that we didn’t ‘tax’ a soul. We merely printed more money into existence, and distributed it differently. Now notice what has happened to the purchasing power of our four persons. Also note that the cost of the gallon and the loaf has risen accordingly. We’re not finished, however. We’re going to come back around and do it again:

Now look at the results. We’ll call this day two, or if your prefer, we can use Federal Reserve Chairman Bernanke’s term, “Quantitative Easing 2.” Notice what has happened. We’ve shifted a good deal of wealth to Person 1, a little bit to Person 2, stolen just a bit from Person 3, and taken Person 4 to the cleaners.

Notice that the price of a loaf and a gallon have doubled. This is because you now have twice as much money in circulation, and no additional material value. Here’s what you need to know, however. Person 1 can be a welfare or other entitlement recipient, or a foreign citizen in a foreign land to whom we’ve gifted money. Person 2 can be a low-skilled, low-wage worker, just below the median income for a family. He’s struggling, and barely getting by. Person 3 is solidly middle class. He either works in a higher-skilled field, or is even self-employed, like Joe the Plumber. He probably barely notices the effect, at first. Person 4 is everybody above that. This is the person that creates almost all the jobs in a free market economy. How do you now expect him to do that?